Miroslava Minkova - Bruker Corp. Frank H. Laukien - Bruker Corp. Gerald N. Herman - Bruker Corp..

Brandon Couillard - Jefferies LLC Dan Leonard - Deutsche Bank Securities, Inc. Tycho W. Peterson - JPMorgan Securities LLC Jack Meehan - Barclays Capital, Inc. Sung Ji Nam - BTIG LLC Max Smock - William Blair & Co. LLC Steve Barr Willoughby - Cleveland Research Co. LLC Patrick Donnelly - Goldman Sachs & Co.

LLC Michael Ryskin - Bank of America Merrill Lynch Puneet Souda - Leerink Partners LLC.

Good day, everyone, and welcome to the Bruker Corporation First Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. And please note that today's event is being recorded. I would not like to turn the conference over to Miroslava Minkova.

Please go ahead..

Good afternoon. I would like to welcome everyone to Bruker's first quarter 2018 earnings conference call. My name is Miroslava Minkova and I'm the head of Investor Relations for Bruker. Joining me on today's call are Frank Laukien, our President and CEO, and Gerald Herman, Bruker's Interim Chief Financial Officer.

In addition to the earnings release we issued earlier today, during today's conference call, we'll be referencing a slide presentation. The PDF of this presentation can be downloaded by clicking on the earnings release hyperlink on Bruker's Investor Relations website. During today's call, we will be highlighting non-GAAP financial information.

Reconciliations of our non-GAAP to GAAP financial measures are included in our earnings release and are posted on our website at ir.bruker.com. Before we begin, I would like to reference Bruker's Safe Harbor statement, which I show on slide 2.

During the course of this conference call, we'll be making forward-looking statements regarding future events or the financial performance of the company that involve risks and uncertainties. The company's actual results may differ materially from the projections described in such statements.

Factors that might cause such differences include, but are not limited to, those discussed in today's earnings release and in our Form 10-K, as well as in subsequent SEC filings. Also, note that the following information is related to current business conditions and to our outlook as of today, May 3, 2018.

Consistent with our prior practice, we do not intend to update our forward-looking statements based on new information, future events, or other reasons prior to the release of our second quarter 2018 financial results in August 2018.

Therefore, you should not rely on these forward-looking statements as representing our views or outlook as of any date subsequent to today. We will begin today's call with Frank providing a business summary. Gerald will then cover the financials for the first quarter of 2018 in more detail.

Now, I'd like to turn the call over to Bruker's CEO, Frank Laukien..

first, the MBT STAR-Carba for possible carbapenem resistance; and two, the MBT STAR-Cepha, a new kit for cephalosporin resistance.

The combined Bologna workflow of identification and selected resistance testing on the MALDI Biotyper takes in total between 60 and 90 minutes and can provide important potentially lifesaving information to physicians and patients at an assay kit price of $30 or less per sample to our customers.

We are very excited about this introduction and the impact the shortened time to result can have for these very sick patients, as well as for the significant hospital cost savings with more affordable bloodstream infection fast-detection methods.

Microbiology and diagnostics, as a reminder, is one of our six Project Accelerate initiatives, and we believe this new Bologna Bloodstream Infection Workflow, together with the expansion of our product offering for fast two-hour time-to-result invasive fungal disease detection, directly from blood and without culture, position us well for further progress in this high-growth, high-margin area.

Turning to slide 8, I am very pleased to announce the appointment of Dr. Falko Busse to be our BioSpin Group President. Falko joined BioSpin in 2015 as Executive Vice President of R&D and has served in a variety of functions, most recently as BioSpin Deputy Group President.

He also has been responsible for BioSpin's operations, marketing and strategy since early 2017.

Under Falko's leadership, BioSpin will focus on key growth and margin expansion initiatives, including our expected GHz-class roll out in future years as well as BioSpin pharma, applied markets and aftermarket growth initiatives, as well as a major lean initiative called Project 2020 for BioSpin's Germany and Switzerland operations.

Falko joined Bruker from Philips Healthcare where he held successive leadership positions. In a moment you will hear from Gerald Herman, our Interim Chief Financial Officer who took over after Tony Mattacchione's departure in mid-March. We are very pleased to have Gerald as our interim CFO and he's off to an excellent start.

On slide 9, I summarize Bruker's key priorities for 2018 and they are fundamentally unchanged. We remain committed to creating values for our customers and shareholders via our Project Accelerate portfolio transformation, as well as our ongoing operational excellence and margin expansion initiatives.

In summary, Bruker delivered a good first quarter, highlighted by the strong year-over-year organic growth improvement in our BSI segment, continued healthy underlying margin expansion excluding currency headwinds, and robust year-over-year EPS growth.

We remain committed to our short- and long-term financial commitments, and we look forward to updating you on our progress on subsequent calls. On that note, let me turn the call over to our interim CFO, Gerald Herman..

Thank you, Frank. I'm pleased to join you today and review Bruker's financial highlights starting on slide 11. As you saw in our press release, Bruker's reported revenue increased 12.2% to $431.7 million in Q1, which reflects organic growth of 4.0%. We reported GAAP EPS of $0.17 per share, excuse me, compared to $0.13 in Q1 2017.

On a non-GAAP basis, Q1 EPS increased 26% year-over-year to $0.24 per share. Q1 non-GAAP operating income was up 8%. On a non-GAAP basis, our Q1 operating margin declined 50 basis points to 12.3%.

This included 140 basis points of negative impact from foreign currency translation versus the prior-year quarter, which more than offset the positive underlying operational trends we saw in the quarter. As a reminder, Bruker has a large cost base denominated in euro and Swiss franc.

With the dollar's year-over-year weakening relative to these currencies, this had a large positive impact on our revenues, but also an outsized currency-driven increase in our costs.

For the quarter, changes in foreign currency had a 7.7% positive impact on revenue and 140 basis points negative impact on our operating margins, but we're roughly neutral to non-GAAP EPS. We generated free cash flow of approximately $35 million in Q1 2018, an increase of $14.2 million or 67% compared with the first quarter of 2017.

We ended the quarter with a net cash position of $63.3 million, down slightly from net cash of $79.7 million at March 31, 2017. The decrease in net cash resulted from the continued use of cash to fund our dividend, buybacks, acquisitions, as well as repayment of borrowings under our revolver in Q1 2018.

We exited Q1 2018 with higher working capital balances, reflecting our revenue growth, late-in-the-quarter product shipment activity, and the impact of the weaker U.S. dollar year-over-year. These effects also resulted in the slight deterioration in our working capital to revenue ratio. Slide 12 shows the revenue bridge for Q1 2018.

In addition to organic revenue growth of 4.0%, we had a small positive contribution from acquisitions of 0.5%. A foreign currency translation was a 7.7% tailwind.

From an organic growth perspective, the 4.0% Q1 2018 organic growth rate included strong gains at CALID, which had high single-digit growth driven by the mass-spec microbiology and optics businesses. NANO and BEST each increased in the mid-single digits. BioSpin had a slow start to the year with a modest year-over-year organic revenue decline.

Regarding BEST, we continue to present BEST revenue growth excluding intercompany shipments, which we view as a better indicator of BEST's underlying growth.

On that measure, BEST revenue increased 5.1% in constant currency in Q1 2018, as BEST benefited from the timing of scheduled deliveries of superconductors to MRI OEM customers and project revenue recognition.

We continue to expect a full-year organic revenue decline at BEST, with a significant double-digit year-over-year organic revenue decline expected in the second quarter.

From an end-market perspective, we saw stable academic market conditions and strong momentum in our product portfolio for industrial research, which again propelled growth for the NANO group. We continue to see growth in biopharma, with a highlight being our mass-spec biopharma solutions portfolio. our microbiology business was off to a strong start.

Semi metrology deliveries remain lumpy but we continue to expect good results in our semi business for the full year. Geographically, and on an organic basis, our European revenue increased high single digits year-over-year in Q1. North American organic revenue grew in the mid-single digits in the quarter.

Asia Pacific revenues were down low single digits in Q1 including some shipment and acceptance delays with BioSpin APAC customers. Overall, we are pleased with another quarter of positive organic growth momentum and the favorable end-market conditions that we've been experiencing. Slide 13 shows our Q1 2018 non-GAAP results.

Our Q1 2018 non-GAAP gross profit margin was 47.5%, a decrease of 10 basis points year-over-year. Higher volume and operational improvements within our CALID and NANO groups were more than offset by the negative impact of foreign exchange movements due to the weakening of the U.S. dollar.

Q1 2018 selling, general and administrative expense of $109 million was up 13% from Q1 2017, with foreign currency translation a major driver of this increase. Higher SG&A expense also included increased commissions on higher orders and revenue, and merit increases.

Our previously announced G&A initiatives, including our new finance (21:18) shared service center in Central Europe, remain on track. Q1 R&D expenses, at roughly $43 million, increased 15% year-over-year, driven primarily by changes in foreign currency rates and the addition of acquisitions and some Accelerated Projects spending.

Looking below the line, net interest and other expense of $2.3 million was $3.7 million favorable versus the prior year, including a favorable year-over-year impact from foreign exchange transactions and the pay-down of our revolver debt in the quarter.

For the first quarter of 2018, our non-GAAP effective tax rate was 23.7%, lower than the 30.6% effective tax rate in Q1 2017, which included certain unfavorable discrete tax items. Weighted average diluted shares outstanding in the first quarter were 157 million, down 3.5 million shares or about 2% year-over-year.

This reflected our 2017 share buybacks, partially offset by stock option exercise dilution. Finally, Q1 2018 non-GAAP EPS of $0.24 increased 26% from $0.19 cents in Q1 2017, driven by the higher revenue and favorable year-over-year tax rate and share count.

Turning to slide 14, we generated approximately $35 million in free cash flow in Q1 2018, which was $14 million higher than in Q1 2017.

This reflected higher net income, an increase in customer advances, and slightly lower year-over-year CapEx, partially offset by the increase in working capital described earlier and the timing of employee bonus payments.

Our cash conversion cycle at the end of Q1 2018 lengthened slightly versus the same quarter in 2017 due to an increase in DSO, largely driven by higher revenues in Q1 2018 and quarter-end shipping activity.

Turning to guidance for 2018 on slide 16, our 2018 outlook for revenue growth, operating margin expansion and non-GAAP EPS are unchanged from our February earnings call.

For 2018 we expect Bruker's revenue to grow approximately 7% on a reported basis, including approximately 3% organic growth and an approximate 4% contribution from foreign currency translation. As mentioned earlier, embedded in these projections is an organic decline in our BEST business, net of intercompany eliminations.

We continue to expect full-year 2018 non-GAAP operating margins to expand between 50 and 80 basis points compared to the 15.6% level achieved in 2017 while we absorb a foreign exchange headwind of 70 basis points year-over-year due to the weak U.S. dollar. Our full-year 2018 non-GAAP tax rate is projected to remain at 25%.

Other guidance assumptions are listed on the slide, including our foreign exchange rate assumptions, which are unchanged from our February earnings call. On the bottom line, we continue to project non-GAAP EPS in the range between $1.34 and $1.38, representing growth between 11% and 14% compared to 2017.

In summary, Bruker had a good start to the year and we remain on track to deliver on our full-year financial commitments. We look forward to updating you again on our Q2 conference call in August 2018. And with that, I'd like to turn the call over to Miroslava to start the Q&A session. Thank you..

Thank you, Gerald. William, we would like to open the call up for Q&A. In the interest of accommodating more of our analysts, please limit your questions to one and a follow-up..

And we will now begin the question-and-answer session. And our first questioner today will be Brandon Couillard with Jefferies. Please go ahead with your question..

Hey, good afternoon.

Frank, on the semiconductor business, any chance you could give us a sense of how orders trended in the quarter? I know you said revenues were relatively flat on timing of shipments, but how were orders? And there's been, I think, some debate as to where we are in this semi cycle, what's your view there? And then, could you just remind us on how big that business is as a percent of revenue?.

Yeah, Brandon. So, orders in Q1 also were a little bit weak in semiconductor metrology, but we expect to have a much better Q2 in both aspects, so we still expect the year to be up for semi. We have so few systems that a couple of systems being pushed back from one to the next quarter, which is exactly what happened, makes a big difference.

So I wouldn't read too much into our data, and of course the general market debate is out there. Many parts of semi are still doing really quite well, particularly in the memory areas. I think we'll be all right this year, probably not growing as fast as last year, but we're still looking to do well in semi for the year..

Thanks. And then a two-part question for you on....

And keep in mind that semi is about 5% of sales, so it's a nice business. It's not really driving all of Bruker..

Okay, good to know. And then, secondly, a two-part question for you on BioSpin. First, on Project 2020.

Is this a new initiative that's just recently come together, or just been kind of going on along in the background and you just hadn't talked about it much? And with respect to the footprint rationalization, are there any expected savings you can quantify at this point? And then secondly, has your outlook changed at all as to how many 1-GHz NMR shipments you think you might be able to get out the door this year?.

So, Project 2020, it's been something that's been evolving and being planned for quite some time, and we're now ready to pull the trigger on the project, primarily in Germany but also with some further investments in Switzerland and a little bit in France.

First of all, I should point out that the $35 million or so that we had mentioned at a recent NMR conference in CapEx, that's in our normal CapEx run rate. So, that's obviously going to be spread over three years. So, there is not a particular bolus of CapEx coming our way, but it's in our normal CapEx spending.

It is a lean project that is expected to reduce our – or to combine our two remaining larger German NMR sites or BioSpin sites into one. We were going – and also, it's going to combine a number of facilities, including leased facilities, third-party leased facilities that we have around our Swiss campus.

Overall, when this is done by middle or late 2020 – it will have various phases, we expect to save about 20% in footprint and have one major site less. Now, there will be some cost savings and efficiency gains with that, but I think that kind of goes into our normal productivity and annual plan, margin expansion.

In terms of identifiable one-time cost savings, it is not as dramatic as previous factories restructurings. This does not affect a large number of jobs, but we do expect it to contribute to our productivity, reduce footprint. And it's kind of a multi-year process. I think it's a very good project.

It will probably have – give us the modern facilities we need for our customers for our further growth, for our applications, for the next two to three decades really. And it's a nice new lean layout with much better flow in R&D and operations and so on. So that gives you some perspective.

Oh, to the last point of your question, yes, we still presently expect that we will have 1-GHz in revenue this year.

Of course that always could get pushed into next year, in which case we are committed to make that up elsewhere, and we then expect to begin gigahertz and gigahertz-plus shipments in – if we reach our technical milestones – into where they begin to move the needle hopefully in 2019, 2020 and beyond. So it's not a 2018 story.

That's one of the Project Accelerate investments that we're making that won't move the needle this year..

Very good, thank you..

And our next questioner today will be Dan Leonard with Deutsche Bank. Please go ahead..

Thank you. So another project related question, Project Accelerate. So Frank, you have talked about accelerating the top line for a little while now, but I don't think you had named the project previously.

And so I guess question one, correct me if I'm wrong, is the naming of this project new? And then secondly, can you elaborate on the significance around formalizing a project for new growth initiatives? Are there targets associated with this? Does it create any organizational momentum around your initiatives? Anything that you can share..

Yeah, we've been – so it's a new name to the external world. We've been calling it Project Accelerate internally all along, and eventually we got tired of always talking to the streets about our six high-growth high-margin initiatives, because that's such – that's a mouthful.

So we're simply beginning to use the internal name for the portfolio transformation also externally. So in that sense, it's not a new project. It's something that we've begun to talk to the street about, I think as of middle of last year, roughly.

And, yes, we believe that over a number of years, Project Accelerate, as it becomes a more significant part of our revenue and as some of the still fledgling initiatives like gigahertz NMR or Proteomics bio mass-spec also hit their stride and become bigger and begin to move the needle, that this will fundamentally improve our organic growth rates.

And we also think that many or all of the Project Accelerate six initiatives that you heard about previously within Project Accelerate, many of them or all of them have qualitatively fundamentally higher margin profiles when they reach maturity and obviously, get – reach volume and begin to move the needle.

So it's, along with operational excellence, the most fundamental and significant part of our strategy going forward. Of course we'll never give up on cost and small restructurings and lean projects; they go with operational excellence. So, it's nothing entirely new. It just gets more and more momentum.

And however having said that, some of these items still don't move the needle or they're still relatively modest in size, $20 million, $30 million, $40 million; some are well above $100 million like microbiology or aftermarket, or biopharma applied is well above that, semiconductor, along with nanomaterials is well above that.

While others, and I mentioned gigahertz NMR or Proteomics bio mass, will still be very small this year..

Okay. Appreciate that. And then for my follow-up question, hoping you could comment on the NIH budget increase.

How quickly do you expect that money to flow, and what are the efforts underway at Bruker to make sure you capture your share?.

Yeah. There's a lot of debate about that, because there's now so much money that needs to be spent quickly.

You'd almost have to – program officers, from what we hear anecdotally, they're calling back existing grant recipients and say, they're raising and increasing existing grants because to some extent they can't spend the money fast enough with new grant cycles.

So that's a little bit of feedback from the academic community with which I interacted quite a bit at the CNC conference. For us, the cycle's still something goes through a grant cycle or someone in an existing application does get funded. I mean, our customers are more optimistic.

But until we get orders, especially for bigger ticket items, big mass specs or imaging or NMRs, and then deliver them, it probably is more likely to go perhaps a little bit late in the year, but mostly become a 2019 story.

But overall, three years of good increases in a row, and deans and people that spend money at universities all much more optimistic, I think it's obviously a good environment for academic spending in the United States in general. And it's not only NIH, also DOE and some others have seen very nice increases. So it's good for the field.

With some delay, I think it's also going to be quite good for Bruker..

Okay. Thanks for that color..

And our next questioner today will be Tycho Peterson with JPMorgan. Please go ahead..

Hey, thanks. First, Frank, just on BioSpin, the NMR, you've commented on delayed shipment and acceptance.

Is this just a customer readiness issue, or is there something else there that is worth highlighting?.

It's a mix of customer readiness and some of our internal operations in having everything ready, magnets and probes at the same time. So it's a little bit of a mix. Part of it is part of due to our own operations and part of it is due to customer sites. I wouldn't read a lot into that, especially at BioSpin.

a quarter just doesn't make a trend and all of us should look at four quarters in a row, but certainly two or three quarters in a row. I don't think there's anything going on. So I think we'll do well and catch up for some of that in the remaining quarters.

And other parts of BioSpin, the preclinical imaging, the aftermarket, and delightfully also the food analysis and clinical phenomics research systems have done really very, very well in Q1. So I think we'll be okay with BioSpin, but we had a bit of a slow start, yep..

Okay.

And then can you help us think about the, I guess relative importance in the new MALDI Biotyper workflow and how you think about I guess competitively versus some of the other ID/AST platform that are out there?.

Compared to the other – what platforms, what was the description that you used, Tycho?.

Other platforms that will do identification and antibody susceptibility testing?.

Yeah..

But more importantly, how does the launch change the market opportunity for you guys?.

Yeah, no, I think it's certainly in Europe. Right now we have CE-IVD and some of that we can leverage outside of Europe, but we don't have FDA yet. That maybe come at the end of next year or so, and – so there's more work to be done, but the European market is of course very important.

It's also a price-sensitive market, so it's always a very, very good testbed for us. We think this is quite important. First of all, it used to be the old dogma was that people don't really make decisions unless they have a AST or resistance data, and these days it has just changed. It's remarkable.

With fast ID, within an hour or so after a positive blood culture, people clearly in hospital settings and ICUs are making treatment decisions, as they should. Some things – some antibiotics are clearly not applicable to certain bugs, and vice versa.

So the fast ID already helps, and then having a very cost-effective way of looking for some of the major resistances – and by the way, using functional tests, not genomic tests, which is subtle but pretty important because there could be other genes or other mechanisms that lead to resistance – by having a functional test on the MALDI Biotyper, and again, very importantly, getting very fast time to resolve, altogether in 90 minutes or so; it just can save a day or two or three.

Let's say typically a day or two. And the other part that nobody wants to talk about is cost effectiveness. These tests will really only find widespread acceptance if they're cost effective.

And I think this is cost effective to where it's, I think – we think it could go into large-scale deployment rather than specialized small-scale deployment for a few publications. So we think this is a really big deal. Obviously take that the perspective is three to five years for that to be rolled out.

The really nice thing is that we have about 1,400 Biotypers in Europe and 2,900 Biotypers worldwide, so we don't need to start with systems placements. People that have these systems can start with those workflows in Europe. If they wish to, they could start tomorrow. So, this is a big deal.

This is another S-curve, of the S-curve for the Biotyper with ID. This is a strategic introduction..

Okay. And then one last one.

Can you just comment on Japan, is there any signs of improvement there overall?.

Japan was a little bit weaker in Q1 on orders. It was a lot better in revenue because it has been – we've had a tick up in bookings previously. So revenues were up, but orders in Japan were actually, went back to looking a little bit weaker, maybe with the exception of industrial research. So, a mixed picture, I would say.

And again, I should heed my own advice and not read too much into one quarter. Let's watch this for two or three quarters. But, it's not....

Okay..

It's not – last fall, last – late last year, I got more optimistic that Japan might have a discernible trend, than I'd say that's not clear that there's any trend..

Okay. Thank you..

And the next questioner today will be Jack Meehan with Barclays. Please go ahead..

Hi. Thank you. Good afternoon. So, wanted to dig in a little bit on the results at Daltonics within CALID, just talk about – I think you had an easy comp there, but results look good.

Maybe just talk about what you're seeing and how you think the business grows through the rest of the year?.

So for microbiology, it's been primarily – instruments have been good, but they're not growing that fast anymore. It's a large installed base and it's still growing, so no problems there.

But the really wonderful part is that from a lower basis, but aftermarket and consumables in particular are growing at a very fast pace, and that of course, they carry good margins. To the point, we're probably within a year or two, half of our microbiology franchise will be aftermarket revenue.

That's probably the first time we have a business like that at Bruker. We're not quite there yet, but we're not that far from that anymore. So, that's doing well, very well. And that's before these product introductions that were at this segment that I just discussed with Tycho that are really quite significant over time.

And delightfully, the life science mass spectrometry business was really quite healthy.

I think our portfolio update with the new timsTOF research systems, with other QTOF systems, with the new magnetic resonance mass spectrometry systems, and importantly also the MALDI systems, the rapifleX doing well in all sorts of life science and academic markets, but also in pharma applications. And we did okay in applied markets as well.

So it's been somewhat broad-based that this business may really get its footing as well, and we were encouraged by Q1..

Great. And then just – it would be great to get an update on your thoughts related to capital deployment.

Just given the share performance, has your willingness to do more buyback increased, and what are you seeing on the M&A front?.

Hi, it's Gerald. I'll just take that question. I guess on the share repurchase question, we have about $73 million still remaining on an existing authorization from the board. That's a two-year authorization, if you might know that. So we still have quite a bit of time to act on that, should we choose to do that.

But from a capital deployment perspective, we like the flexibility to continue to pause or restart share repurchases depending on the opportunities we see in front of us that support the core business..

Thank you..

Sure..

And our next questioner today will be Sung Ji Nam was BTIG. Please go ahead..

Hi, thanks for taking the questions. First of all, congrats on the quarter. And Frank, maybe on BioSpin, particularly for your NMR business, if I recall correctly I think there was some headwind on margins due to product mix last year – higher mix of low-field NMR, and I think if also if I remember correctly, you expected that to normalize this year.

And so just based on kind of the order pipeline that you are seeing now, do you continue to expect that to be more normalized this year in terms of product mix?.

Yeah. I think 2016 had a particularly favorable product mix. So I'd say it's a little too early to say in the year, because it's only a quarter. I don't think there's anything that remarkable yet. But there are ongoing operational efforts to improve margins at BioSpin, but I would not expect a quick rebound from product mix..

Okay. Thank you for that. And then, on the life science mass-spec side, obviously you saw some strong growth there this quarter. I was wondering if you are seeing overall kind of end-market – positive end-market growth, or do you think that that could be attributable to some market share as well – taking some market share as well? Thank you..

In the life science mass spectrometry?.

Yes..

Yes. I think we're doing well with our unique TIMS capability, our trapped ion mobility spectrometry capability. It's still early days also in proteomics, but a lot of people are taking a look at it.

It's a rather unique and intriguing and formidable capability that just hasn't been available on research mass specs, and we're targeting it particularly at proteomics. But also, our high-end rapifleX, and other MALDI-TOFs and Q-TOFs are doing well.

So I think those are healthy markets, and I think we're – it's only a quarter, but we're somewhat optimistic that we'll do well with our refreshed product line in life science mass spectrometry this year..

Great. Thank you..

And our next questioner today will be Amanda Murphy with William Blair. Please go ahead..

Hi. This is Max on for Amanda. I just wanted to follow up on a comment that you made around end markets, you said they mostly remain healthy. And I'm just wondering, based on the results for the quarter, where you feel most optimistic about the opportunity for upside to guidance.

And then within that specifically, I know we talked a little bit in the prior quarter about maybe some moderation of growth in China.

How has that played out through the first quarter here?.

Yeah, well, I don't think it would affect guidance necessarily, but if I look at trends, obviously in Europe we expect growth rates to settle in and become more normalized. In 2016, it was a steep drop; in 2017, in the recovery phase you always have a temporarily higher growth rate.

So maybe European growth rates become more normalized, but they're still pretty good and I think the normalized level can be healthy as well. But Europe isn't going to grow at high single digits forever.

That's just not going to happen, right? And China, we expected for after – double-digit growth for a couple of years now to moderate a little bit anyway, and we think that's happening, and we also had a couple of NMR and BioSpin delays there, so there were a couple of noise things, as you would call them, in the quarter.

So we'll have to observe that. And in terms of upside, I think there may – not necessarily this year for us as revenue, but I wouldn't be surprised if the U.S., including U.S. academic market, and – but maybe also U.S. markets in general after tax reform, continued to pick up. So I'm somewhat hopeful that the U.S.

may, if anything, maybe accelerate further, and maybe that will then affect our 2019, but that remains to be seen..

Got it. Yeah, that's helpful. Thank you. And then on a bit of an unrelated note, I know you mentioned AVANCE in the quarter, and I'm just trying to get a sense of how much – if that contributed, and if so, how much and then how penetrated AVANCE is in terms of selling into your existing NMR base moving forward..

So, just for clarification, AVANCE, we've been using that in multiple generations for over 15 years. So, obviously you mean the AVANCE NEO, which is sort of the new....

Yes..

...architecture, the fourth generation of the AVANCE, if you like. Yeah, no, that's really coming along very nicely, and there's now about 300 units installed with customers. We've been shipping that ever since Q2. We've been shipping that primarily for the more demanding research applications, high field solids and so on.

And now we've taken the second step earlier this week at that ENC NMR conference, with a compact, fitting-below-the-bench AVANCE NEO NanoBay. Sorry, it's a rather long name, but it works for NMR customers. And that really is for 300-MHz and 400-MHz routine customers.

So, the ramp-up for the NEO new platform, which is really a generational change, it's really a new architecture, not just incremental improvements with this multi-receive architecture being fundamentally enabling new experiments and actually quite a bit of new experiments that were shown at this conference that, as a matter of fact, you couldn't run on older spectrometers anymore.

So we're nowhere near penetrated there. Obviously between us and other vendors, there is years of upgrade business, and we have seen some console upgrade business – uptick in console upgrade business, or upgrade orders, already also last year.

We expect that to continue, and if anything, pick up more momentum as we now cover the full frequency range and applications from routine organic chemistry all the way to ultra-high-field systems. So that's going really well..

Yeah. Got it. Thanks..

And our next questioner today will be Doug Schenkel with Cowen. Please go ahead..

Hi, good afternoon. This is actually Chris (49:21) on for Doug today. And my first question is just on operating margin. I think operating margin guidance implies expansion is (49:27) much more material in Q2 through Q4, since Q1 margins declined year-over-year.

Could you just remind us what are the key drivers to the margin expansion for the balance of the year? Is it mostly volume driven or do you have some incremental restructuring initiatives that are expected to benefit margins later this year?.

Well, actually, it's a number of those. We did have significant BSI volume and revenue growth put into the outlook for 2018, together with mix. As well, we expect operating leverage, together with the Project Accelerate initiative that Frank's already mentioned. We also have a number of continuing operational excellence initiatives.

But I'd say those would be the main factors..

Okay. Got it..

Yeah, no major restructuring at this point. I mean, Project 2020 at BioSpin is a multiyear lean initiative. It will take out some cost over time, gradually. We had the European shared services center moving to Central Europe that – those are incremental operational excellence steps that we're taking every year.

It's not that we – like in the last three or four years when just about every year we had one or two significant restructurings. The further operating margin expansion comes more from – comes from operational excellence and from the acceleration of organic growth, and of course the different margin profile of our Project Accelerate initiatives..

Okay.

And then just for my follow-up question, could you provide a bit more detail on APAC performance? Specifically, was the decline isolated to just BioSpin or was it more broad-based by segment and product class, and maybe can you just provide updated expectations for APAC growth for the year?.

Yeah, we don't go to that level of granularity. We're not updating our view in general. For us, the issue is always that a quarter just doesn't mean all that much. Some – one of our divisions might be slow, sluggish in a quarter and then have a great quarter the next one, and you average it over two quarters or three quarters.

I mean, China, China we don't see quite the pace that we have, and we've alerted everybody to that. Last year that double-digit expansion in China, in our opinion that maybe – we think that's slowing down, is our impression. And, yeah, compounded with that we had some BioSpin delays in China in Q1.

But that's the type of more noise stuff that you really – we will look at that, and I would encourage you to do the same, I look at that really seriously after two or three quarters, because one quarter – if I slice it by product and then by geography and look at any given quarter, I see more noise than information.

So I look at trends after two or three quarters. I don't see any clear trend, other than the longer term trends that China probably also will not grow at in the mid-teens or high teens for – on a sustainable basis. That's not a surprise to us so, we had assumed that..

Okay, great. Thanks for taking my questions..

And our next question today will be Steve Willoughby with Cleveland Research Company. Please go ahead..

Hi, good evening. Just two quick things for you, Frank. First, could you just comment on how orders for the overall company was in the first quarter, compared to I believe the high single digit order growth you had last year? And then secondly, you put up 4% organic growth here this quarter. Your guidance, which is left unchanged for the year, is 3%.

You had some shipment delays in a couple of areas here in the quarter.

So, just wondering kind of what gets worse as the year goes on, compared to the 4% growth you had here in the first quarter?.

Yeah, I'm not saying that anything gets worse. We just – I mean, we just don't touch our guidance after one quarter. For us, Q4 is so important, and Q4 is still a bit away. So we're comfortable with our guidance right now. We're pleased with our first quarter.

If you recall, BEST was still a growth contributor in Q1, and BEST, we highlighted that, had a really exceptionally high revenue in Q2 of 2017. So BEST will have an organic double-digit decline in Q2 specifically. So that's not news to us, but probably how the quarters flow that may give you some more color as you model the year.

So with that, I think – to your first question, Steve, our BSI organic order growth was again in the mid-single digits. So, we were – we think we're on track. And, yes, for BEST for the full year, we still expect an organic decline even though it grew organically in Q1. But then it'll have a pretty steep dip organically in Q2.

That's how the year evolves with really the BSI segment, that 89% to 90% of the business, much more steady and a little bit of BEST noise on top of that, which is – I know it's lumpy, and so it's a little confusing. But for the year, we're comfortable with our guidance. That's the best guidance we have at this point in the year.

And for us, obviously with long lead times and Q4 always being a big quarter, I think it's appropriate at this point. But, yeah, we're pleased. We're pleased with organic mid-single digit order growth in Q1 at BSI..

Thank you very much, Frank..

And our next questioner today will be Patrick Donnelly with Goldman Sachs. Please go ahead..

Great, thanks. Frank, maybe one on Europe. Can you just talk through the trends you saw in that region this quarter? PMI data, specifically the UK was a bit soft and got even weaker in March and April.

So I'm curious, given the volatility you've seen in that region over the course of the last two years, how you're feeling about that, and how you've seen maybe the macro data flow to the government funding perspective in that region in the past?.

Yeah, so Europe was very good for us in Q1. I mean, I think I just repeat probably, and I apologize, sort of my longer term comment that Europe isn't going to grow on a sustainable basis in the high single digits. So we're kind of taking that into account.

We thought Europe had very high order growth rates, and this will translate into nice revenue growth rates this year for us, because it was in part a recovery. The pendulum swinging back after a significant dip in 2016.

So we think Europe orders and demand will normalize at a healthy level, but it was probably at non-sustainable high single digit level that was a sign of a recovery after 2016. We think there's really nothing more to it than that. So we're optimistic on Europe. But you know, with those observations..

That's helpful. And then maybe one on the aftermarket revenue, another strong quarter. I know that's been a focus for you, specifically on the service side.

So just wondering where we are in that story, how the attach rate is trending, and how you're feeling about a sustainable growth rate in that part going forward?.

Maybe I'll leave that to Gerald. I mean, long term, we think aftermarket and particularly consumables is something that is one of our growth initiatives. It also has very good operating margins, although lower gross margins.

Quarter-by-quarter, Miroslava, can you comment on that? Again with a caveat, don't read too much into one quarter?.

Yeah. On aftermarket, Patrick, it was just – on an organic basis, it was actually slightly below the overall corporate average this quarter. The services, software and consumables are doing quite well and grew a lot faster.

But what you see in our disclosures in the quarterly filings is a number that includes some accessories – accessories and parts, and that was the part that was a bit of a drag this quarter. So the growth initiatives are growing fast, but there is another component that you will see included in that number..

Thank you..

And our next questioner today will be Derik DeBruin with Bank of America. Please go ahead..

Oh, thanks. It's Mike Ryskin on for Derik. Thanks for squeezing us in. I wanted to follow up on a couple of the earlier questions about the NMR shipments and some of the lumpiness you talked about elsewhere, Nano and CALID. I just wanted to get a sense where you said it was a mixture of events with some customer delays.

Any indication on – are these orders that are – are these shipments that are imminent or are a little bit more spread out over the course of the year? And then as far as the 1GHz goes, again, last – having last we talked, it was mid-2018.

Just trying to get a sense for, if you're looking at the comps for the BSI was pretty flat over the bulk of – 2Q, Q3, Q4 2017, trying to get a sense for pacing, as far as you can tell?.

Yeah, no, it's in the NMR side, we catch up in part or over the remainder of the year. That tends to be spread out over multiple quarters. That doesn't happen in one quarter, typically. The one 1-GHz, if it goes into revenue, it would be in Q4.

And – but again, it's – this one's obviously below $10 million, and so it's not – while it's memorable, it's not that crucial for BioSpin or Bruker overall in any given year. Obviously with some Gigahertz business, if it, once that gets going hopefully 2019 or 2020, it'll make a more sustainable difference.

But if we get one in this year, which is still our plan, it would be in Q4 revenue..

Got it. Thanks. And then a quick follow-up. You mentioned that the interest and other income, there was a – the $3.7 million delta, year-over-year; part of that was the revolver pay down, part of that was the FX transactions.

Can you sort of break that down, how much each one contributed, to give us a sense for how that should progress over the course of the year, because that was pretty meaningful delta on our model?.

It's principally on foreign exchange, but we're not prepared to give base numbers, but it's principally foreign exchange that had the impact in that case..

Okay. Thanks..

Sure..

And our next questioner today will be Puneet Souda with Leerink Partners. Please go ahead..

Yeah, hi, Frank. Thanks for – hi, Frank, thanks for taking my question. So just briefly on the NMR types that were in the timing, part of the timing issues. Are those more around – anything around the lower magnets, 300MHz, 400MHz or 600MHz, or is this largely associated with the 1GHz? I just wanted to clarify..

It has nothing to do with the 1GHz. And my recollection is that it's more mid to higher field, so not routine 400GHzs. But, I think more mids to higher field, but not ultra-high field. There's nothing to do with 1GHz..

Okay. Got it. Thank you. And then just overall, just the recent appointments, obviously Falko in BioSpin and Burkhard in BEST.

How would you, say, describe the makeup of the team now compared to what you had before, and any other businesses where you think team needs to further evolve in order to grow things even further? Any thoughts that would be helpful. Thank you..

Yeah. I think we have a really strong team. I mean, we just have a terrific bench strength and that we had someone like Falko to step in, with some further grooming and training, within about a year after René Lenggenhager, if you recall, left to become CEO of a publicly-traded company.

I'm just very impressed by how our team has stepped up and some individuals have stepped up. So, I think we're in really – we just had that team here for a quarterly leadership team meeting, and I think we have a very strong management team at this point in time..

And then just one last one quickly. In terms of the NMR orders in U.S., most of the larger 1GHz, these are going in Europe. I think there's potential for one philanthropic order in U.S. But do you have expectations from NIH at all in U.S. for 1GHz or right around that field strength, or is it going to be largely still O-U.S.? Thank you..

From what we have visibility, it's O-U.S. So, actually all – well, almost all Europe, a little bit in Canada, a little bit in Israel, that's also O-U.S. In the U.S., there is indeed, there is a philanthropic order from a research – a medical research – a premium – premier research organization, that was – that was encouraging.

I presently don't think that there would be some concerted U.S. NIH program. At least, it's not fully visible yet. So I think it might be more in consortia or individual universities maybe stitching together some NIH, some state, some philanthropic, some endowment funding. There is clearly some interest in the U.S.

and in the NMR community to do something, but it is not as organized as it has been in Europe. However, the discrepancy is becoming bigger and bigger, and there's some very compelling science one does with gigahertz-type NMR. So it's, I think it's a question of time. But right now I don't see like an organized X-Y-Z initiative in the U.S.

where NIH says yeah, yeah, we're investing in that. But I would assume that they are open to individual investigators to try to get a piece of the money from NIH and then combine that with other funding sources. That's often what you've seen in the U.S. So that's the present state. But, yeah, I know it's much healthier O-U.S.

at this point, surprisingly..

Okay. Thank you very much. Thanks, Frank. Bye..

And this will conclude our question-and-answer session. I would now like to turn the conference back over to Miroslava Minkova for any closing remarks..

Thank you, William. Thank you for joining us this evening. During the second quarter, Bruker will participate in the Deutsche Bank Healthcare Conference in Boston, the Jeffries Healthcare Conference in New York, and the William Blair Growth Stock Conference in Chicago.

We invite you to meet us at these conferences or visit us at our headquarters in Billerica, Massachusetts. Thank you, and have a good evening..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines..